Monday, March 24, 2008

Capital vs. Money

I've just put Mark Thoma's Economist's View blog on my blogroll, which is long overdue, as I've linked to discussions there with some frequency. One interesting thing is that someone recently referred to the people there as “left wing”, despite the fact that a goodly number of them, including me, would have been called "conservative" before The Movement took over. I continute to comment on “right wing” folks, as so many of them are lost in libertarian utopianism, or else they feel constrained to follow some sort of party line, presumably because that’s who pays the bills. In matters of this nature, it's important to remember the quote from Upton Sinclair:

"It is difficult to get a man to understand something when his salary depends on not understanding it."

Generally speaking, I find that economists don’t often distinguish between money and capital. For example, they write about flows of international capital, when they’re actually talking about money flowing from one country to the other. Sometimes this makes it hard to get at the actual real economics of a situation. For example, it is often said that the U.S. is importing a huge amount of capital from China. On the other hand, a financial instrument is also often called “capital.” Since what is actually happening is that the U.S. is importing a lot of consumer goods from China (though China is actually adding only marginally to their value, having itself imported most of the goods, with only the final assembly being done by Chinese labor), and paying for those consumer goods with U.S. Treasury bonds. Now consumer goods are rarely called “capital” while bonds often are, so it looks like the “capital flow” is going the other way. But actually, neither part of the flow looks much like what is often called “capital,” i.e. something used to assist in the production of other goods and services.

Then there is the matter of “transfer payments.” This is a phrase that seems to have been invented to describe certain sorts of governmental payments, ostensibly those without a corresponding exchange of goods and services. Often, Social Security or Veteran’s benefits are named as an example. Huh? Both of those, in fact, require an earlier service (paying Social Security taxes or serving in the military). On the other hand, paying interest on the Federal debt is not considered a transfer payment, despite the fact that on a cash flow basis, it removes money from taxpayers, and transfers it to bond holders. One can argue that there was a previous exchange for the bond, but that argument isn’t used for Social Security, is it?

If you look at the details, there is a pretty clear distinction that can be made between a sort of “capital investment” that pays returns by actually increasing the amount of wealth in the world (a factory, an apartment building, a road, someone’s education), and one that merely gives someone the right to a future transfer of money. Moreover, you’d think that libertarians would be sensitive to the notion that some of those monetary transfers absolutely require governmental power and some do not. A government bond is intrinsically based on the taxing power of government, for example, while a secured personal loan does not. (Obviously some loans require government as an enforcer of contracts, but that’s usually considered kosher in libertarian circles, and besides, something like pawning your watch doesn’t even need that).

Now it so happens that most intellectual property requires a pretty agressive government policy. IP is basically a government-mandated monopoly, and a the enforcement of IP can get pretty obtrusive, such as raiding warehouses, issuing subpoenas to third parties, etc. It’s not something we’d put up with without a pretty hefty social return (the idea is to pay for the effort of creating IP in the first place, yes?), but a lot of people seem to view copyrights especially as some sort of “natural” property, and some of those argue for copyright in perpetuity. This is not the sort of mistake that Ayn Rand would make (and indeed, she did not).

There are some very good reasons for wanting to have a lot of “store of value” items around in an economy. Personal savings are a good thing, and I do not want to be poor in my old age. I also think it’s a decent thing to have a certain amount of personal, family wealth passed down from generation to generation. Still, having such things is an invitation for the “accumulation of great wealth,” and I don’t think that the existence of truly massive multi-generational fortunes has much to recommend it. The history of it doesn’t look that good, frankly, and I’m included the effects on its supposed “beneficiaries.”

In other words, I’d like to see some more attempts by economists to separate “productive” investment from “transfer payments.” Currently, I don’t see much effort being made to even make the distinction. I understand that it’s a hard problem, but that’s no excuse for pretending that it doesn’t exist.

10 comments:

black dog barking
said...

Someone sometime back (bonddad at Daily Kos?) raised a distinction between Industrial Capitalism and Financial Capitalism that seems on point here. The invisible hand cranking out CDOs and Enron-style financial instruments is not playing the same game as when it was producing rail cars and power generators.

I guess I'm most surprised that the ultimate beneficiaries of the current system seem hell bent on gaming it to death. Are they stupid? Diseased? Both?

Financial products are far superior to hard goods in a lot a ways; less upkeep, not subject to physical entropy, etc. It must be nice to receive a boatload of manufactured good in exchange for ack'ing an electronic message with the right protocol. However, the very convenience of those recognition systems is also a profound weakness. A little creative degaussing could wreak havoc. Or force enough people out of the system, a different sort of havoc.

I would think that those with the most to lose would be a little less aggressive in their gamesmanship. A game that rewards cheating over excellent play is unstable, doomed.

There's an indirect connection between this Old v New Economy stuff and your comment a few posts back about self promotion as a factor in publishing success. The observation about the importance of self promotion is dead on -- witness Chris Clarke today. But that don't make it right.

Writing is, by itself, a challenging and demanding undertaking. The only benefit I can see to rewarding writers based on their promotional skills lies in the profit accounting of publishers, in the perception that the promoting writer is measurably less expensive. I can't *prove* it but it sure looks like this sort of savings is both temporary and ultimately potentially fatal for publishers as they commit to the cheaply promotable over a more rational, reader-based publishing criteria. Writers spending less time writing has to mean less quality writing and less quality has to mean, eventually, fewer customers.

Which brings us to the unavoidable sports metaphor: when Major League Baseball starts handing out roster positions based on player's promotion abilities then MLB becomes like major league wrasslin'. The more you ignore the rules the less interesting becomes the game.

Good points all, but I'll note that the real outlier is probably Industrial Capitalism. Financial Capitalism is little but "tax farming" in disguise, old wine in a new ideological bottle, the bottle containing both usury and "the vig."

The other part of the Grand Scheme is to fence off ever-increasing parts of the natural world, to propertize it and claim it as personal wealth. Then one makes a few pious noises about "The Tragedy of the Commons" to make the claim that things are better that way.

Being an advocate of passing on generational wealth instead of generational poverty, you have given an insight that needs to be address the defining of capital as it relates to the real economic reality. The truth about building wealth is being financially educated. There is no such thing as the rich are getting richer and the poor are getting poorer instead it is the rich have financial education they pass on and the poor do not. That is bottom line to our financial crisis.

Having known a few "trust fundies" in my life, I would have to say that the "financial education" that the rich pass on to their children often exists in minds that are external to those children themselves. Indeed, the tendency for rich heirs to blow the family fortune is pretty much the reason why trust funds were invented in the first place.

Similarly, many of those entrenched in poverty seem to believe that if they ever gain wealth, that it will be stolen from them somehow, and observation suggests that this is not an unfounded concern.